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2019 Annual Meeting: “Defining the New Normal”

Keynote Speaker General (Ret.) Stanley McChrystal

Members Enjoy Three Days of Dynamic Speakers and Networking Opportunities

PESA’s 2019 Annual Meeting focused on the positive impact the oil and gas industry has made on trade, employment, and the international geopolitical landscape. Discussions outlined the latest in innovation, investors’ attitudes toward the industry’s carbon footprint and industry’s efforts to diversify the workforce.

KEYNOTE: KARL ROVE
The meeting was kicked off on Wednesday by former presidential advisor Karl Rove who commended the oil and gas industry for improving the economic well-being of the U.S. and changing the country for the better.

He commented on the changes the country has experienced since the export ban was lifted. According to Rove, more than 60% of oil and gas supplies for the U.S. were imported in 2000. By 2019, that number dropped to 12%. This shift brought jobs back to the manufacturing sector, rewarded Americans with the lowest energy bills they’ve seen in years as well as produced a declining trade deficit.

“It strengthened our U.S. economy, we are now a low-cost energy producer with immense ramifications,” Rove said. “It affects everything. Look at the average American’s utility bill, compare it to the average German or Brit, take a look at the balance of payments. In 2017, we had an $800 billion trade deficit, but it would have been 30% larger, $275 billion bigger, if we were not exporting energy.”

While market analysts and Wall Street are focused on the effects of climate change on business, Rove points out the U.S. is lessening the amount of greenhouse gas emitted.

“We are the only major industrialized country that is reducing the absolute amount of greenhouse gas we produce while still growing our economy. We are the only one that has achieved that.”Karl Rove, Former Senior Advisor and Deputy Chief of Staff to President George W. Bush

Rove went on to explain that in 2000, about 20% of the world’s CO2 emissions were coming from the United States.

“We were 5% of the world’s population,” he stated. “We were 25% of the world’s economy, 20% of the emissions. Today, we’re still about 5% of the world’s population, we’re slightly more than 25% of the world’s economy and our emissions are 15% of the world’s emissions. On the other hand, China has gone from four billion tons to ten billion tons during that same period of time. We peaked at roughly six billion tons in 2007 and we’re down to about 5.5 billion tons today. They’ve gone from 16% of the world’s emissions to 30% of the world’s emissions of CO2.”

PESA’s NEW BOARD OF DIRECTOR’S CHAIR

Incoming PESA Board Chair Richard Alabaster, President – Surface Technologies, TechnipFMC opened the meeting on Thursday by highlighting the global impacts that are changing the way business is conducted within the services and equipment sector. He touched on the meeting’s theme “Defining the New Normal” asking what is the new normal? And is it possible to define?

Alabaster cautioned that the outlook in the services and manufacturing sector is still evolving, but he believes it is a transformative time in the industry.

He also stated that “some of the disconnect between operator recovery and the services and equipment sector can be laid at the feet of tighter spending and the pricing changes many companies made during the downturn.”

Alabaster believes industry needs to look at the impact trade disputes and international turmoil are having on the sector.

“The uncertainty and unpredictability of a trade war on the supply chain has hurt everyone from operators to manufacturers,” he said. “Escalation of a trade war only causes market uncertainty.”

The new Chair explained that PESA Leadership is working on charting a path for the next three years for the Association.

“By defining programs and initiatives that reflect what our customers want, what our investors want, and what our member companies need, we can insure PESA best deploys its resources to serve the industry,” he stated.

PESA President Leslie Beyer

PESA UPDATE

PESA President Leslie Beyer provided an update about the Association explaining to participants that the Association’s strategy of Train – Elevate – Network continues to guide the committees in their work on behalf of the industry.

“In 2014, there were 35 individuals involved in PESA committees,” Beyer said. “That has grown almost tenfold to 347 people involved in committees right now.”

She explained that the Train tenet guides the Association’s efforts to educate not only the workforce, but also young people interested in STEM. The Elevate principle focuses on advocacy and the group’s efforts in Washington, D.C. and state capitols to help member companies navigate through regulations and legislation affecting business every day. Finally, Networking has been, as Beyer calls it, “a signature strength of PESA.”

More than 100 events are hosted by PESA across the U.S. and internationally each year giving members many opportunities to develop relationships with others in the sector. All of these efforts are driven by the members of the Association.

KEYNOTE: GENERAL STANLEY MCCHRYSTAL

Gen. Stanley McChrystal,Former Commander of U.S. Forces in Afghanistan and Founder, McChrystal Group

Retired four-star general, Stanley McChrystal, former commander of U.S. and International Security Assistance Forces (ISAF) Afghanistan and the former commander of the premier military counterterrorism force, Joint Special Operations Command (JSOC) began with a history of his life and career coinciding with the military history of that point.

He outlined the creation of JSOC explaining that the events of the failed rescue of the Iran hostages led to the creation of the command. Comparing this structure to business, he spoke about how success can hide inefficiencies in an organization.

“When times are good a lot of things that are weak in an organization just aren’t apparent,” he said.

In October 2003, McChrystal became commander of JSOC, which he described as an “extraordinarily successful counter terrorism organization.” He expected to lead the group as it had always been led, but that’s not what happened. The military couldn’t get control of the violence that was killing innocent Iraqis, so the focus of the command had to change.

“Now I’ve got this extraordinarily elite organization that is very proud of itself, and because it’s very proud of itself, it’s also not really interested in changing much.”Gen. Stanley McChrystal, Former Commander of U.S. Forces in Afghanistan and Founder, McChrystal Group

The command looked like a traditional pyramid shaped bureaucratic organization similar to the federal government and companies such as General Motors.

“On the surface, we had a look and feel to us, but in our heart and soul, we were designed to be predictable, designed to be efficient, designed to run in traditional, industrial age ways,” McChrystal said, “and those ways that really date back to the beginning of the Industrial Age made a lot of sense. They worked because if you could be efficient, more efficient than your enemy, you would succeed.”

However, the structure of the terrorist organizations forced JSOC to change. These groups were not built in a pyramid structure, but were constantly changing and extraordinarily adaptable.

Information technology was the change agent that forced a shift in the typical military mindset. The terrorist groups didn’t need the proprietary communications equipment such as secure internet and radios that the U.S. Armed Forced relied on. They used commercial cell phones and commercial internet and it changed the nature of the organization.

“They used it in their personal lives, so they automatically used it in their terrorist lives and it made the organizations fundamentally different,” he explained. “Much like we find competition in business now or competition in politics, they operated by an entirely new set of rules based upon different technology available.”

In an effort to beat this new enemy, McChrystal and his team didn’t reorganize the team. They changed the course and structure of the team.

“We decided to execute a hybrid. We maintained our structure. We didn’t try to reorganize because I think that’s often an exercise in self-deception. Instead we changed the two things that mattered most. We changed how we managed information in the organization, how we shared it, passed it and how and where we made decisions and it made us an entirely different organization.”Gen. Stanley McChrystal, Former Commander of U.S. Forces in Afghanistan and Founder, McChrystal Group

Military leaders changed the way they operated to be more like a human brain to be quicker and more adaptable. They connected everyone together and did away with the cascading chain of command. Those soldiers on the ground were empowered to make decisions based on real-time situations.

“Now at first you say, ‘Wow that’s just throwing all of the responsibility to young people,’” he said. “The reality is, it is throwing responsibility to them, but you’ve empowered them with an understanding of the situation they didn’t used to have because it used to be kept in the C Suite, and they are the only people who can make the right decision because they are the only people close enough to the problem.”

Inspiring employees to embrace the change is key according to the General but be prepared for push back and naysayers. Keep in mind the objective. “If the enemy is shooting artillery or mortar fire at you, and they are hitting the position where you are, you should move,” he advised.

Yeilding reported that one of BP’s priorities is lowering the carbon footprint of the company while moving to a more gas-focused portfolio and modernizing operations to a fully digital business model.

“We call it the Dual Challenge,” she said. “It is how we satisfy society’s need for increasing energy, all forms of energy, their demand and need for that, while balancing the need to reduce greenhouse gas emissions especially CO2 and methane.”

According to Yielding, BP looks at what society needs to prosper and for the population in emerging areas to live safer, happier and longer lives.

“So, we take all of that from a global perspective and say what are our business priorities, what does the new normal look like?”Cindy Yeilding, Senior Vice President, BP America

Yielding stated that one piece of the business that continues from the past into the new normal is safety and working to do no harm to the environment.

“Operating safely and doing no harm in that framework, we also need to remain a viable business for our shareholders and our employees,” she said.

She also recommends that companies think about a license to operate as a social responsibility. “Those two seem to be coming closer and closer together now and I think that is here to stay as part of our new normal.”

Doug Lawler, President, CEO & Director, Chesapeake Energy

Lawler used one word to describe the new normal: pain.

“You think about how many different companies that have gone through serious changes in the way we approach our investment, the way we think about strategy for the long term, the way we think about capital allocation, it’s just been absolutely painful,” he stated. “I think whether you are an equipment supplier, a service company or an upstream producer or a refiner, we’ve just endured a considerable amount of pain.”

So, while Chesapeake has been working through this tough time, initiatives are underway to address climate change and environmental stewardship.

“There is a significant global initiative to develop climate change initiatives and policies to ultimately improve the climate,” Lawler said. “Large companies must have complete ownership of environmental stewardship and safety in order to protect and respect the environment, our employees, contractors and service providers.”

Lawler encouraged audience members to look beyond efforts currently under way in the U.S. and see some of the issues that are not being addressed in other parts of the world.

“The U.S. today has less than 300 gigawatts of coal fired power generation, and at present there’s more than 300 gigawatts of coal fired generation being constructed and built in Asia. So, while the U.S. is doing its part, we also have a global issue that we are a part of.”Doug Lawler, President, CEO & Director, Chesapeake Energy

A survey was sent to PESA members with 36 companies responding. Sixteen of the companies had 1,000 or more employees, 20 had less than 1,000, and 22 of the responding companies were global. The report focused on the 41% of employees of the respondent companies that are U.S.-based. The study showed that nearly 30,000 entry-level positions were filled during the time period researched and 85% of those positions were filled by males.

The research also showed that of the women employed by the oil and gas industry, a majority fill administrative roles such as human resources or legal. Males dominate the technical positions available in the industry. Research showed that 48% of companies with more diversity at the senior level have found improved market share year-over-year compared to their counterparts who did not have it.

PESA’s Engagement Committee announced the development of a toolkit on diversity and inclusion that comprises collateral material and a journey map to guide companies on the path to greater diversity. The committee has a call-to-action for all member companies: compare your numbers to the survey, have a conversation with your executives on why diversity is important and invite other employees to help with the initiative. Develop a plan and implement strategies within the company.

The results of this survey show there’s a great opportunity to expand diversity within the sector and the PESA Members have worked diligently to provide a tool to accomplish this goal.

Overall, the speakers agreed we are in an energy transition that is both exciting and unpredictable, and innovation is crucial to the industry’s future.

Mingé said he believes collaboration is key for the industry in the future as we see the demand for energy growing due to the population increasing and shifting from poverty into the middle class.

“Most of the growth is not in America,” Mingé said. “It’s not in Europe. It’s in India, it’s in China, other parts of Asia. A little less so in Africa. The population is demanding a better life and income is growing.”

John Mingé, Former Chairman and President, BP America

Mingé also pointed out that this energy needs to be affordable, reliable and secure.

“Our customers and stakeholders across the world are saying ‘yes we want the energy and we want it to be affordable, but we’d like for it to be cleaner. We want it to have less emissions. We worry about climate change.’” Mingé shared data that estimates carbon emissions will increase by seven percent over the next 22 years.

Blaine explained that as California surpasses the United Kingdom as the 5th largest economy in the world, a transition must occur as demand for energy increases in the Golden State. Her company recently launched an innovation project in order to lower cost and increase recovery.

“We have relied on continuous improvement, manufacturing processes, and we have, year-over-year, been able to maintain our costs,” she stated.

Vivek Chidambaram, Managing Director, Accenture

According to Blaine, this change was a shift in the culture of the company. Aera went from a company based on processes to one focused on innovation.

“Bringing together analytics and data together has vast advantages,” Blaine said. “We’re standing up integrated operations control centers for all of our fields.”

Tubman discussed the shift from the large E&P companies funding research departments to the service companies picking up the innovation baton.

“What we’ve been doing in our industry for some time now is pushing the risk profile, the place where the risk is taking place, further and further down the supply chain so eventually now the large service companies end up buying smaller service companies so that’s where they get the technology.”

Buying small start-up companies that are hyper focused on one technology is also a growing trend.

Tubman explained that Marathon is not creating a separate department to execute the innovation initiative. They are encouraging the assets to take on the effort themselves.

“It’s about providing ideas and systems to them to give them the framework, so they can do it themselves,” he said.

Johnson explained that water management has evolved into an industry no one predicted due to the drilling of unconventional wells. His company operates in the Delaware Basin, and he shared statistics on water in that basin and the infrastructure needed.

“In the Delaware Basin in the next 25 years, industry has to handle one trillion barrels of water,” he shared, “and when you do the arithmetic on how many trucks it would take to handle a trillion barrels of water, there’s just not enough trucks in the world to make that work.”

“We’ve seen flowbacks of 60 to 70,000 barrels a day,” he continued. “You can’t line up enough trucks, which means you have to have pipes in the ground.”

Jason Fournier, Chief Operating Officer, Ancova Energy

Johnson went on to explain how the water business has shifted from ownership by the small mom and pops and big energy service companies to the midstream side of the business. He also said that the large E&P companies own 85% of the water infrastructure in the U.S.

Fournier explained that the benefits of his small company include the ability to be nimble and creative in business dealings allowing for partnerships with E&P companies on water projects which incentivizes them to align with the midstream mindset instead of combatting it.

“I’ve learned that the smaller companies do have a slight advantage because they have flexibility in what they can do” he said.

In the marketplace, Fournier sees 2019 activity as flat; however, he sees a lot of infrastructure is being constructed especially in the Permian Basin. This lack of downstream capacity is affecting the operators ability to get natural gas to market, and the water industry right now is very price driven.

“Most people now won’t buy just acreage,” Fournier explained. “You’ve got to have capital dollars to actually drill it and prove up the reserves.”

Stephen Johnson, CEO & Director, WaterBridge

Johnson sees the high level of activity in the Delaware Basin as a challenge for the entire industry.

“Especially in the Delaware Basin it’s a challenged environment to get quality construction workers,” he explained. “Without adequate places to live or eat, you have to build man camps. It’s a people constrained business today which is always the case in any boom area like the Delaware.”

Fournier sees technology as a tool to provide good service but cautions there is a down side.

“It’s great to be able to use your phone to see every pressure, volume, everything you need to see about your system, that’s fantastic, but need reliable alternatives when it is down,” he said. “It’s still all about the service that you provide because we’re trying to provide service to the producers and, in turn, we need good service from the service providers.”

Analyst Panel

ANALYST PANEL

The Analyst Panel, moderated by PESA Vice Chair Rod Larson, President & CEO, Oceaneering International, engaged the speakers in a discussion about Wall Street and investor attitudes toward the service sector.

A recent trend that John Daniel, Managing Director & Sr. Research Analyst, Oil Service, Simmons Energy has seen is a lack of interest by investors in the servicing sector.

“The performance in the space has been pretty bad over the last several years in terms of financial returns, discipline, etc.” he said. “When you look at the weightings of energy with respect to the S&P 500, they are at or near 20 to 30-year lows.”

“The ESG (environment, social, governance) concept is really important to be focused on because there’s limited dollars flowing in energy as it is today,” he said. “And so, if you are a public company, you need to pay attention and do things that don’t keep you out of potential investors’ portfolios.”

Daniel advises that companies need to do whatever they can to lower their carbon footprint.

“If you are a company and you want to make sure you have access to quality investors, you should pay attention to ESG,” he recommended. “I know PESA is working with that so take advantage of the toolkit.”

“Battery storage will be one of the biggest changes in this field,” he said.

He also sees challenges with renewables in the marketplace.

“I think the biggest challenge would be the regulatory aspect of renewables,” he stated. “The utility, the grid, the infrastructure we have today is not made for a higher mix of renewables. It’s not made for two-way communication where homeowners sell renewable electricity to the grid, so a lot needs to change. The power markets need to change.”

Mandloi sees renewables as an economical form of energy.

Maheep Mandloi, Vice President, Equity Research, Credit Suisse

“The cost of solar and wind has fallen tremendously in the last few years,” he said. “Solar and wind are the cheapest sources of energy globally. With subsidies, solar and wind are even cheaper than natural gas.”

He went on to say that solar power has grown six-fold over the past ten years, but he says this increase is subsidy-driven.

PESA Advisory Board Member Jim Wicklund, Managing Director – Energy Group, Stephens, Inc. sees a shift in ownership of the E&P industry stocks which is forcing E&P companies to earn the cost of their capital.

“Today the industry is being judged on return on invested capital,” he explained. “If you haven’t earned your cost of capital in the last eight years that means you’ve spent eight years destroying the equity value of your business and that’s not an opinion. That’s a fact.”

Wicklund explained that the E&P companies now have to watch their capital budgets more closely. Historically when oil prices have risen, drilling budgets have increased and service revenues have gone up. However, this was not the case last year which caused concern among investors. Wicklund outlined that the E&P companies are now owned by people who insist on seeing not only a return OF capital but also a return ON capital.

“You are at least earning your cost of capital, you are not inherently destroying equity value of the business,” he commented. “So, to be perfectly honest, defining the new normal is going to be people talking less about free cash flow and more about their actual return on invested capital.”

PESA would like to thank all participants and sponsors of the event. Plans are underway right now for the 2020 Annual Meeting in Half Moon Bay. Registration is currently open, and we hope to see you there!